A New York-based brokerage allowed overseas clients to run a scheme aimed at distorting stock prices by rapidly canceling orders, according to the U.S. Securities and Exchange Commission.
Clients of Hold Brothers On-Line Investment Services were “repeatedly manipulating publicly traded stocks” by placing and erasing orders in an illegal strategy designed to trick others into buying or selling, the SEC said today in a release. Hold Brothers, its owners, and the foreign firms Trade Alpha Corporate Ltd. and Demonstrate LLC agreed to settle allegations that the New York broker failed to supervise customers and pay $4 million in total SEC fines.
The SEC complaint targeted practices that abused high-speed computer trading on American equity venues. As high-frequency activity has grown in recent years, the agency’s efforts to stop fraudulent practices such as “layering” or “spoofing” have extended to the automated trading tactics.
“Direct access firms like these are the gatekeeper to our markets,” Sang Lee, managing partner at research firm Aite Group LLC in Boston, said today in a phone interview. “That’s why the SEC is doing this. This is certainly the area that they need to focus on, and on a larger scale.”
Along with Hold Brothers, the SEC charged its co-founder and president, Steve Hold, who created and partially owned Trade Alpha and Demonstrate, according to today’s release. Robert Vallone, a former chief compliance officer and chief financial officer, and William Tobias, another executive, were also charged and agreed to the penalties.
A phone call to the Hold Brothers main number and an e-mail to the general media address weren’t immediately returned.
The SEC described layering as placing an order with no intention of having it executed in an effort to deceive others into paying an “artificial price” for a security. Hold Brothers executives were aware of e-mails and other indications that manipulative trading was happening and “recklessly continued” to provide the firms access, it said.
The trading occurred from at least January 2009 to September 2010, the agency said.
The Financial Industry Regulatory Authority and exchanges owned by Nasdaq OMX Group Inc., NYSE Euronext and Bats Global Markets Inc. fined Hold Brothers $3.4 million for manipulative trading activities and other violations, bringing the total fines to the broker to more than $5.9 million.
Regulators have required brokers to tighten controls when they give clients direct access to markets, warning that so-called sub-accounts can be used to hide wrongdoing. The SEC implemented the rule in July 2011 directing firms to limit risks associated with direct access. The rule ended unsupervised trading, or “naked access,” to markets.
Regulators fined the market-making unit of automated trading firm Getco LLC $450,000 in March for failing to maintain proper supervision over its stock buying and selling.
In September 2010, Trillium Brokerage Services LLC, a proprietary trading firm, was fined $1 million for sending orders to electronic stock venues aimed at deceiving investors, Finra said.
Nine traders at New York-based Trillium entered orders on the Nasdaq Stock Market and NYSE Arca designed to create the false appearance of buying or selling in an attempt to get better prices than they would have otherwise, Finra said in a statement. The 46,000 instances generated about $575,000 in profit and took place between Nov. 1, 2006, and Jan. 31, 2007, the regulator said.
“The fairness principle that underlies the foundation of our markets demands that prices of securities accurately reflect a genuine supply of and demand for those securities,” Daniel M. Hawke, the chief of the SEC’s enforcement division’s market abuse unit, said in the statement. “The SEC will not tolerate any abusive practice that is designed to distort these natural forces.”
The trading that Hold Brothers was fined for occurred from at least January 2009 to September 2010, according to the SEC statement. Finra said that Demonstrate was Hold Brothers’ largest account and that the trades primarily involved traders in China.